Accounting and procedures for petty cash

1. Definition of petty cash

Companies routinely make small purchases, which are not
appropriate or practical for check or credit card payments. Examples of such
purchases include stamps, supplies, travel expense, and delivery charges, among
others.

To permit such purchases, companies establish a petty
cash fund. The size of the fund depends on how much cash is spent on small
purchases every two weeks to a month. The petty cash fund is set to be
sufficient to cover expenses for that period of time. The fund normally ranges
from $100 to $500.

Usually, one individual, called the petty cash custodian or cashier, is responsible for maintaining the petty cash fund and
documentation of disbursements made and reconciling the petty cash fund at the
time it is replenished.

A petty cash fund is cash in a secure lock box, which
is used for small purchases and maintained by a petty cash custodian.

2. Journal entries and procedures for petty cash

Let's look at the journal entries and documentation used in
working with a petty cash fund, and then we will review a detailed example.

2.1. Establish petty cash fund

The first time a petty cash fund is established a company
writes a check to a designated petty cash custodian for the amount of the petty
cash fund. The custodian cashes the check and puts the cash in a secure lock
box. At the time the fund is created and petty cash is received, the following
journal entry is made:

Account Titles

Debit

Credit

Petty Cash

000

Cash

000

2.2. Disburse petty cash for expenditures

When a company employee spends some cash on small purchases
(usually, with a prior approval by a manager), the employee brings the purchase
receipt to the petty cash custodian. The custodian then disburses the amount of
cash spent to the employee to compensate for the purchase. The custodian also
fills out a petty cash voucher, asks the employee to sign it, attaches the
purchase receipt to the voucher and places them in the secure lock box with the
remaining petty cash.

Sometimes the employee who needs petty cash receives it from
the custodian before making a purchase. In this case, the custodian fills out a
petty cash voucher, asks the employee to sign it and gives necessary amount of
cash to the employee as an advance. After the purchase is made, the employee
brings back the purchase receipt and change. The custodian adjusts the original
voucher to reflect the change received, attaches the purchase receipt to it and
places both in the secure lock box with the remaining petty cash.

There are no journal entries at this point.

The petty cash vouchers serve as proof of cash spending or
purchase advances to employees in case a manager or internal auditor makes an
unannounced audit of the petty cash fund. The vouchers also serve as
documentation showing what expenditures were made with petty cash and are used
to prepare the petty cash journal when the fund is replenished.

A petty cash voucher typically includes the following
information:

Voucher number

Date

Amount

Expense account

Vendor name

Signature

A blank of a petty cash voucher is presented below (you can
also download this MS Excel file for your use):